Forget the credit crunch, this is the credit soup

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This recession has largely been blamed on restricted credit but rather than vilify bankers, is there another trail of blame, asks Michael Blastland in his regular column.

Here's a detective story, a whodunit. Where do we point the finger for the recession?

Too easy, you say.

I ask because inflation is in the headlines, again. Is that a clue, or a red herring?

Up, down prices seem all over the shop. One week we're on the cusp of the dreaded world of falling prices. Next - as we learnt recently - food prices are puffing up, affecting particularly the poor who spend a larger proportion of their income on food. In another week or two, the official figures might well show that price changes over the year are negative.

If we had surveyed manufacturers in mid-2008 and asked, 'What's worse, obtaining credit or rising costs?' what would the answers have been?

All this reminds us that probably no one actually buys the balanced basket of goods that represents the average spending of the average citizen and forms the inflation rate. We each buy parts of it - and your £30 a week on petrol doesn't move like my £30 a week on cheese (it's a lie about the cheese, but you see the point). Prices change at different rates. Averages often disguise wide variations in experience.

This is well understood. On both the Office of National Statistics and the BBC websites you can calculate your personal inflation rate. And below is a screen grab - just to show how it could be done - from the New York Times last year (see internet link, right) of an excellent way of visualizing that official basket. It allows you to see price changes for different goods and their weightings, based on US figures.

But it's not consumer inflation that I want to talk about this week. It's the recession, and what feels like a forgotten part of the story: inflation for business.

The talk, the blame, has fallen on crunched credit. But inflation, that other whammy, had long been doing its worst and arguably still is. As with consumers, it's been doing it unevenly. Should it carry more guilt? Read on and judge the case.

First, look where it hit hardest. The chart on the right shows the horrible peak in prices paid by manufacturers for their raw materials since the point five years ago at which input prices began to rise after a long period of stability.

More recent data even suggests manufacturers' input prices are rising again, and despite recent falls, they are still more than 40% higher than five years ago. In mid-2008, they were more than 60% higher. That hurts. It's the kind of price pressure many thought was past.

Is the next chart a coincidence? It shows manufacturing's woes in the recession (a much bigger slice of the economy than the banks, by the way) in an index of manufacturing output.

This fall is much steeper than in the recession of the early 1990s, comparable to the pace of decline in the early 1980s. The fall in manufacturing output - 12.5% so far - has accounted for a hugely disproportionate share of this recession. (Note that the scale on each vertical axis varies slightly to show the relative change.)

Here's another interesting parallel. In the 1970s the oil price doubled and then doubled again. We call these the oil price shocks. They define that period and are blamed by some for wrecking the decade. In the 2000s, guess what? The oil price more than doubled and then more than doubled again. The price rise was arguably worse than in the 1970s.

A trend similar to that which helped derail the economy in the 70s seems to qualify as no more than a footnote today. Are we missing something?

Ah, some remark, but the oil price rise has gone. The interesting story now is deflation, as we said, and the banks, as ever. But does "gone" (actually the oil price is also still about double what it was at the beginning of the decade) mean that it didn't hurt, didn't affect profits, didn't influence decisions to invest or employ, didn't damage confidence?

Web of intrigue

If we had surveyed manufacturers in mid-2008 and asked, "What's worse, obtaining credit or rising costs?" what would the answers have been? Varied, I'm sure. If you were there, do tell us.

But there's no doubt that manufacturing had it hard and in explaining why it's suffering now and much of the rest of the economy with it maybe we've remembered only half the pain. Maybe we should have called the forgotten half the cost crunch.

Does that mean the banks are innocent? No, it simply means that unlike the trail of guilt or the web of intrigue in a whodunit, the economy needs a different metaphor altogether. How about soup?

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